Things to consider if you want to ride the Santa rally

Things to consider if you want to ride the Santa rally

IT MIGHT not be up there with mince pies and reindeer, but it is a Christmas tradition that the stock market performs well in December, experiencing a so-called Santa rally.

It is a tradition that appears to be backed up by the statistics.

Indeed, in 26 of the past 30 years, the FTSE 100 index has produced positive returns in the run-up to Christmas, according to analysis by Fidelity International, the investment company.

Ed Monk, associate director for personal investing at Fidelity, said: “While many stock-market superstitions should be taken with a pinch of salt, our analysis shows that the Santa rally might be more real than Santa Claus himself, with December producing a positive return nearly nine out of ten times in the past three decades.”

Other experts also believe in the Santa rally.

Adrian Lowcock, head of personal investing at Willis Owen, the DIY investment platform, said: “The Santa rally has long been regarded as one of the more statistically robust market trends.

"In December, the stock market tends to be flat in the first couple of weeks of the month before rising strongly in the last two weeks.”

Since the FTSE 100 was created in 1984, it has increased by an average of 2.6 per cent during the month of December, excluding dividends.

It has also fallen only six times during December over the past 34 years, most recently in December 2015, according to Willis Owen.

The Santa rally might be easy to prove by looking at historical data, but it is nevertheless harder to explain.

Jason Hollands, managing director of investment business Bestinvest, said: “One theory is that fund managers reduce their cash weightings and window dress their portfolios with stocks that have performed well, ahead of reporting to clients in the New Year.”

But it is difficult to pinpoint an exact reason. Lowcock said: “It may simply be down to the goodwill associated with the festive season, which puts professional investors in a positive mood.”

The Santa rally does not appear to be confined to the FTSE 100. Bestinvest analysed the December capital returns of a range of stock markets over the past four decades and discovered strong evidence that global markets typically deliver rising share prices during the festive season.

For example, the MSCI World Index, which follows the performance of shares across the globe, rose 77% of the time during December, gifting investors a median return of 1.3%.

While the rally was less obvious across the emerging markets, which include China, South Korea, Latin America, Russia and South Africa, December was nevertheless more often than not a positive month.

Looking at data for the MSCI Emerging Market Index, which goes back to 1995, shares in developing countries rose 65% of the time in the month of December, with a median return of 3.3% - the highest of all the markets in the study.

Investors could certainly do with some Christmas cheer. So far, 2018 has shaped up to be a volatile year for the markets, with most indices now trading lower than they were at the start of the year after a bruising couple of months. The FTSE 100, for example, opened the year at about 7,650 points but is now hovering below 7,000.

There is no evidence to suggest that poor performance earlier in the year lessens the chances of a Santa rally. However, it was only in 1987 that the Santa rally was strong enough to reverse the downward trend.

In the year to November 1987, the market was down by 2.7% before going on to rally by 8.9% over the course of December.

Of course, there is no guarantee that markets will pick up in December.

Laith Khalaf, senior analyst at advisory business Hargreaves Lansdown, said: “The unfolding Brexit drama will undoubtedly play a part in how the stock market performs this Christmas, and this could push stock prices in either direction.”

Experts also advise against short-term investment strategies.

Monk at Fidelity said: “Trying to time the market to take advantage of these short-term trends can have very costly consequences if you get it wrong.

"It’s far better to stick to tried and tested investment principles, such as investing for the long term, staying invested through the cycle, saving regularly and being well diversified across asset classes and geographies.”

Despite this, the Christmas period can be a good time to review your investment portfolio to ensure it is still meeting your needs for the year ahead.

As Lowcock at Willis Owen said: “Investors should continue to focus on good quality managers who can add value throughout the year and not just at Christmas.”

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